What is a Home Reversion Plan?
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I’ve been talking to my neighbour about Equity Release. He tells me that I can sell a share of my house to a company and they’ll give me the cash. Can you explain how this works and if I will get market value for the share?
Diane Fish of Smith & Pinching responds:
The arrangement you describe is known as a Home Reversion Plan. It is less popular these days than the alternative – a Lifetime Mortgage – although it should always be considered when advising on this type of lending.
Home Reversion Plans do indeed involve selling a proportion of your home to an Equity Release provider – and the size of the share will depend on a number of factors, including your age and your health.
You ask if you will get market value for the agreed proportion: I’m afraid the answer is that you will normally get less than its equivalent market value. This is partly because you will retain the right to live in your house for life (or until you go into long-term care) and because, when the house is finally sold, the provider will receive their percentage proportion of the sale proceeds, irrespective of how the housing market is performing at the time of the sale.
There are no repayments or interest to be paid with a Home Reversion Plan, although some older schemes sometimes charge ‘peppercorn’ rents. You will, however, still be responsible for all of the running costs and maintenance of your home.
Home Reversion Plans are still suitable in some cases, but Lifetime Mortgages offer greater flexibility and are more commonly chosen these days.
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A Lifetime Mortgage is a loan against the value of your home that you don’t have to pay back until the house is sold. You can pay interest, but this can be “rolled up” – compounded and then repaid when the property is sold. A maximum amount can be set from the outset based on age, health and property value. If you only need a proportion of this sum, then the remainder can be placed in a reserve account for potential future use, known as a drawdown arrangement. This means you only pay interest on the sums actually withdrawn.
Taking out a Home Reversion Plan/Lifetime Mortgage will mean that the value of the estate you leave to your family when you die will be reduced. It may also affect your entitlement to any means-tested benefits both now and in the future. Equity Release can be more expensive when compared to a normal residential mortgage. In addition, you will still be responsible for maintaining the property.
This is a Home Reversion Plan/Lifetime Mortgage. To understand the features and risks, ask for a personalised illustration. There will be a fee for Equity Release advice. The precise amount will depend upon your circumstances, but we estimate that it will be a minimum of £1,100. Any opinions expressed in this article do not constitute advice.
For more information, please visit www.smith-pinching.co.uk